Wealth Management in Chinese Family Enterprises

What to do with your self-made riches? This is a problem that most wealthy Chinese are currently facing. Preparing a wealth management plan in advance will help Chinese family companies avoid many problems including inheritance.

According to the China Family Business Report, a survey that was prepared and published by several Chinese business organizations, China's first generation entrepreneurs are aging and many of them will retire in the next 5-10 years. Interestingly, however, nearly three quarters of the entrepreneurs do not want to pass the family business on to the next generation and half of their children did not want to inherit it anyway, because their business interests differ from those of their parents.

Having no successor is one side of the inheritance problem faced by Chinese family enterprises. On the other hand in the cases where children actually do want to inherit their family business, such enterprises are becoming embroiled in numerous succession battles and corporate governance scandals. For example, Stanley Ho, the octogenarian Macao gambling king, fought a public battle this year with family members who were seeking control of his casino empire. Hong Kong's Kwok family engaged in an equally colorful fight over who should run Sun Hung Kai Properties, one of the world's most valuable property companies.

In spite of these succession battles and corporate governance scandals, the family business model seems to be in robust health in China and other Asian countries. In a survey of 10 emerging Asian countries published by Credit Suisse in September 2011, it showed that companies with significant family influence accounted for more than 50 percent of all listed companies, and just under a third of total market capitalization-six times the level in 2000. In addition, nearly two-fifths of the companies had listed within the last decade, suggesting that growth in this sector is accelerating. Moreover, total returns have consistently outperformed the aggregate for local benchmark indices in the 10 countries covered by the survey, and dividend yields have exceeded the original average in 9 of the last 10 years.

What accounts for the success of family enterprises? One key answer is that Asian family companies tend to be younger than their counterparts in Europe and the US. That helps to make them hungrier and more growth-oriented than either family owned companies in other regions or their non-family controlled competitors in Asia.

To sum up the two sides of the inheritance problems faced by Chinese family enterprises -no successor or else succession battles-- it appears that finding a competent successor well in advance of retirement of the company founders is the key solution to the problem. In fact, however, there is a better option: wealth management. For example, succession could be managed by structuring a family business as a trust or foundation under which heirs are merely beneficiaries unless and until certain conditions are met (e.g., founder is confident in heir and heir is interested in running the business). A trust structure also allows for a trustee to select an external CEO to run the business when the founder retires until either the trustee becomes confident in an heir's ability to step into that position or the settler (company founder) directs the trustee to give a specific heir control of the business on a trial basis in order to test whether the heir has the necessary capability and willingness to do the job. This type of plan avoids a mess in the enterprise when an heir is not ready or not qualified to control of the business. In addition, in the event that the company founder dies suddenly while his or her children are too young or too weak to succeed him or her immediately, nobody else will be able to control the interim CEO who is chosen to run the business until an heir is ready to step into that position.

 Bain & Co, a US management consulting firm, concluded in a recent report that only a fifth of boards at top Indian companies have been consulted about succession issues. (In China, where successful private companies are a relatively new phenomenon, it can be presumed that even fewer boards at top companies are discussing succession issues). By comparison, 60 percent of top US boards discuss chief executive succession annually. Furthermore, large numbers of US companies and wealthy individuals tend to consult with and entrust wealth management consultants to help them handle their self-made riches.  Consequently, there are less fierce succession battles in the US family-owned companies than in their Asian counterparts.

RayYin & Partners, began its practice in wealth management when the firm was established in 2005. RayYin provides legal advice concerning wealth management to individuals and companies who want to manage their financial interests more effectively. For more details about RayYin's practice in wealth management, or make an appointment or discussion about what to do with your property, please logon the website of RayYin (www.rayyinlawyer.com) or contact Ms. Hao Wang at wh@rayyinlawyer.com or Mr. Yi Zhou at zy@rayyinlawyer.com.